Chapter 1 - The role of financial management. After studying chapter 1, you should be able to: Explain why the role of the financial manager today is so important, describe “financial management” in terms of the three major decision areas that confront the financial manager, identify the goal of the firm and understand why shareholders’ wealth maximization is preferred over other goals;. | Chapter 1 The Role of Financial Management © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI The Role of Financial Management What is Financial Management? The Goal of the Firm Organization of the Financial Management Function What is Financial Management? Concerns the acquisition, financing, and management of assets with some overall goal in mind. Investment Decisions What is the optimal firm size? What specific assets should be acquired? What assets (if any) should be reduced or eliminated? Most important of the three decisions. Financing Decisions What is the best type of financing? What is the best financing mix? What is the best dividend policy? How will the funds be physically acquired? Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet). Asset Management Decisions How do we manage existing assets efficiently? Financial Manager has varying degrees of operating responsibility over assets. Greater emphasis on current asset management than fixed asset management. What is the Goal of the Firm? Maximization of Shareholder Wealth! Value creation occurs when we maximize the share price for current shareholders. Shortcomings of Alternative Perspectives Could increase current profits while harming firm (., defer maintenance, issue common stock to buy T-bills, etc.). Ignores changes in the risk level of the firm. Profit Maximization Maximizing a firm’s earnings after taxes. Problems Shortcomings of Alternative Perspectives Does not specify timing or duration of expected returns. Ignores changes in the risk level of the firm. Calls for a zero payout dividend policy. Earnings per Share Maximization Maximizing earnings after taxes divided by shares outstanding. Problems Strengths of Shareholder Wealth Maximization Takes account of: current and future profits and EPS; the timing, duration, and risk of profits and EPS; dividend policy; and all . | Chapter 1 The Role of Financial Management © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI The Role of Financial Management What is Financial Management? The Goal of the Firm Organization of the Financial Management Function What is Financial Management? Concerns the acquisition, financing, and management of assets with some overall goal in mind. Investment Decisions What is the optimal firm size? What specific assets should be acquired? What assets (if any) should be reduced or eliminated? Most important of the three decisions. Financing Decisions What is the best type of financing? What is the best financing mix? What is the best dividend policy? How will the funds be physically acquired? Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet). Asset Management Decisions How do we manage existing assets efficiently? Financial Manager has varying degrees of .
